The U.S. Department of Commerce reported that Advance Estimates of U.S. Retail and Food Services sales for July rose an adjusted 0.5% from the prior month to $390.4 Billion, while sales increased 6.5% (unadjusted) compared to the year-ago period. Year-over-year, this was the 21st straight gain after 15 consecutive months of declines.

Electronics Stores showed surprising strength in July, posting the 2nd largest monthly gain since last June (+1.4%), but were still down 0.7% from a year ago and are down 0.3% year-to-date. Department Stores (-0.4% YoY / -0.8% MoM) continue to underperform and have shown the most weakness so far this year, falling 1.0% through July compared to 2010.

While the overall increases compared to last year look impressive at first glance, total nominal sales in June still haven't registered much growth from July 2007 (+5.1% unadjusted, 5.0% adjusted).

Tempering the optimism from the strength in spending was news this morning that consumer sentiment in the U.S. tumbled in August to the lowest level since May 1980. The biggest one-week slump in stocks since 2008 and the downgrade of country's top credit rating have consumers feeling even more pessimistic than during the depths of the recession.

The preliminary reading of the Thomson Reuters/University of Michigan Index of Consumer Sentiment plunged to 54.9 in early August, down 13.8% from July and 20.3% lower than a year ago. The Current Conditions Index fell to 69.3, the lowest since November 2009, from 75.8 the prior month, while the Expectations Index tumbled to 45.7 from 56.0 in June, and sits 27.3% lower than last August.

“Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government's role,” survey director Richard Curtin said in a statement. “This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent; it was the realization that the government was unable or unwilling to act,” Curtin added.

This followed on the heels of yesterday’s report showing the Bloomberg Consumer Comfort Index fell to the lowest level in mid-May as the largest share of respondents (52%) said the economy is in poor shape in 16 months.

The comfort index is "a short step away from minus 50, the level historically associated with the deepest depths of recession," said Gary Langer, president of Langer Research associates LLC in New York, which compiles the index for Bloomberg.

On the bright side, retail earnings have been strong so far with Polo Ralph Lauren, Macy’s, Nordstrom and Kohl’s all beating analyst estimates and raising full-year guidance. However, this morning’s report from J.C. Penney reminds us that the low and middle-income consumer continues to struggle.

The company said earnings were flat to last year as sales declined 0.8% to $3.91 billion, while same-store sales rose 1.5% and internet sales were up 2.8% to $326 million. CEO Myron E. (Mike) Ullman said “The challenging economy continues to impact the moderate consumer,”

Contrast that with the results from Macy’s, who attracts higher-earnings consumers and has benefited from increased penetration of private and exclusive brands and the success of its My Macy's localization initiative. Earnings jumped 64% in the quarter as sales increased 7.3% to $5.94 billion, while same-store sales rose 6.4%.

Much of the strength can be attributed to e-commerce growth: Online sales (macys.com and bloomingdales.com combined) were up 40.2% in the quarter, positively affected the company's same-store sales by 1.2 percentage points and are up 39.2% year-to-date. News that the company will begin shipping internationally to online shoppers in 91 countries will only accelerate e-commerce growth through the rest of the year.

So far, it seems shoppers have been willing to accepts higher sticker prices, and lean inventories and targeted promotions have prevented much margin erosion. Over 40 major retailers will report earnings next week and we are anxious to hear what retail executives have to say about expectations for the rest of the year.

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